Global heads of trading at major asset management firms are spending less and less time actually trading. After conducting in-depth interviews with eight heads of desks, The TRADE discovered that those occupying these roles are seeing more of their time taken up by new regulations rather than trading.
It is no surprise that the all-encompassing MiFID II is challenging the role of the global head of trading. Despite requiring extensive experience in trading to rise up through the ranks, it is usually the case that the bigger the team, the less time required to trade.
Being a head trader now means keeping up with market structure changes and regulation, rather than with what is going on in the markets. This has meant a dramatic reduction in the amount of time devoted to trading.
Of eight global head traders interviewed by The TRADE, half said trading takes up on average between 0% and 5% of their time on a weekly basis.
One global head trader says: “I deal myself on average between 2% and 5% of the number of equities and fixed-income every month, with more concentration on end-of-momnth for fixed-income and quarterly earnings season for equities.”
While this has been a theme for traders over the last five years, 2017 is shaping up to be a crucial year for the buy-side to get to grips with MiFID II in Europe.
Where’s my Bloomberg?
One head trader explains: “Regulation is very important and takes a lot of my time up, not only in making sure we adhere to the latest rules but also figuring out how we need to adapt to the new ways of trading that have evolved to cope with the regulatory changes.”
Speaking to The TRADE in its Q4 2016 issue, sources suggested that some senior traders have voluntarily opted to leave their roles – and in some cases the industry – because they do not want to face the barrage of regulatory scrutiny coming their way. Over the last two years, The TRADE has counted no fewer than 20 buy-side heads of desk or senior traders from big name European asset managers leaving their jobs.
Two global head traders told The TRADE that they have even given up their Bloomberg terminals, and another says, “I’m trying to organise myself to avoid such a situation.”
One former senior equities trader, who asked to remain anonymous, has said the impact of regulation has diminished the global head trader role in daily trading activities, in which “due to previous regulatory creep the role of hands-on head of trading has been diminishing to the point where that role is basically a quasi-compliance/client sales role.”
“Most traders are pretty self-sufficient these days and the head of trading role is just a go between...clearly as we are seeing in a climate of cost cutting and margin squeeze it makes sense to have traders interacting directly with the gate keepers,” adds the former trader.
MiFID II is perhaps having the greatest impact on global head traders, as they look to get to grips with the mountain of work required to be compliant from January 2018. One global head trader commented that around 20-30% of his time is taken up attending meetings on MiFID II and compliance, while another said MiFID II and EMIR has accounted for between 35-40% of his time. The majority of head traders surveyed by The TRADE said around a quarter of their time is spent on MiFID II since January this year.
Another reason cited by global head traders has been scale. As trading teams expand as a result of consolidation, it has become more common for global heads of trading to take a step back.
One head trader says: “As my team has expanded and my involvement in projects has increased, it is very rare for me to execute order flow.”
Another told The TRADE: “We trade infrequently, but when we do it generally needs ‘all hands on deck’. The trading is split approximately 50/50 but I can see my share shrinking as we get busier. If we hired a third trader, my time would be better spent on higher level tasks.”
Redefining the role
Certainly the role of the buy-side trader has become significantly more complex and carries far more responsibility than it may have done in the past, requiring a broader range of analytical skills to scrutinise their sell-side counterparts.
On the one hand, regulation has diminished the trading abilities for global head traders, but on the other it has made their role more encompassing.
“Regulation has actually shown how important the head of trading is now, as they can own a significant amount of responsibility for oversight of execution, team management, budgets, processes and everything else that provides a service to portfolio managers and external clients,” says Paul Squires, global head of trading and securities financing, AXA Investment Managers. “It is completely natural in that structure therefore that the head of trading doesn’t do any execution which generally requires full concentration on markets.”
“I have a global team of 70 with 38 traders, executing over €750 billion notional of assets per year. The appropriate execution platform is increasingly about scale, operational efficiency, technology, workflow and strong governance, and that is what the global head of trading is responsible for. So should they be responsible for trading? It really depends on the size of your execution team and arrangements.”
This is not to say that the head traders are totally absent from the trading process.
For some asset managers that break down their management structure by regions and/or asset classes, those head traders are more involved in the physical execution process.
Those head traders interviewed said that regulation has become a duty that has become incorporated with their day-to-day trading responsibilities. One head trader argued that he has to trade in order to understand the challenges his team are facing.
“If you don’t get under the bonnet you can’t fully appreciate the challenges your team face,” one head trader highlights. “That could be technological, regulatory, flows, coverage etc. you have to have exposure. The trading landscape changes so fast that if you are not close to the detail of the business it can get away from you,”
Another head trader comments: “Head traders are, to some extent, expected to be market structure experts. However, time spent ‘at the coalface’ is invaluable in helping understand the challenges that traders face on a daily basis. Getting the best price for the end client is paramount, but finding liquidity to get the trade done, in what seems to be an ever changing trading landscape, is also highly important.”
Another explained that dealing with regulation should not be solely dealt with by the head trader.
“Given that the regulation issue affects many areas of an asset manager it cannot be solely the preserve of the trading head to deal with in my view,” says a head of trading for UK and Ireland. “Compliance, investment control, PMs and legal among other functions all have vested interests.”
“I would argue that given the cost pressures being experienced by asset managers and the amount you still need to be able to provide an all-round service of which an increasing part is linked to regulatory issues. ”
Asset managers are now hoping to attract a different kind of candidate that has high-level analytical skills and an interest in technology as a way to assist the head trader with this changing landscape.
“I’ve hired a new talent who helps me for various topics, data analysis, post-trade reporting, drafting of procedures, writing of internal notes on MiFIDxs II, etc. My young colleague has a fixed-term contract and does not need a Bloomberg terminal today,” a global head trader explains.
Certainly the regulatory impact won’t last forever. Once MiFID II comes into force next year, staying compliant will be a large component to the global head trader role, but with systems and preparations in place there could be a greater focus on trading.
The role largely has an emphasis on market structure, but with a new breed of buy-side traders and regulatory experts making their way through the ranks, head traders will revert back to what they enjoy the most, making money.